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Flush With Cash, Apple Plans Buyback and Dividend

Timothy D. Cook, chief executive of Apple, and other executives had signaled their willingness to consider a plan for the company’s cash.Credit
David Paul Morris/Bloomberg News

Apple announced on Monday that it would at last return some of its cash pile to shareholders in the form of dividends and stock buybacks, at a cost of more than $10 billion a year for the next three years. But it is attracting so much cash — $1 billion a week in the last holiday season alone — that the move will not put a dent in Apple’s coffers.

Apple’s decision to pay the dividend was long awaited, yet it is an extraordinary one for a company that, despite its age, is growing more like a start-up.

While paying dividends is often a sign of cash-rich companies that are running out of big growth opportunities to invest in, Apple, founded in 1976, has not yet reached that level of maturity. It continues to pump out huge new technology hits like the iPhone and iPad, and its sales in the recent holiday quarter grew 73 percent from the period in 2010, which itself was 70 percent higher than the holiday 2009 quarter. And, late Monday, Apple said it had sold three million of its new iPads since they were introduced on Friday.

Apple’s cash reached nearly $100 billion at the end of last year, a level that seemed increasingly unjustifiable to many investors, who fret about how little interest Apple earns on the money, estimated at less than 1 percent. Apple’s cash figure is almost twice the cash balance of the company with the next biggest hoard, Microsoft.

“They have a ridiculous amount of cash,” said Douglas J. Skinner, a professor of accounting at the University of Chicago Booth School of Business. “There’s no feasible acquisition that Apple could do that would need that much cash.”

Apple executives said the move was also intended to attract a new class of investors. Many investment funds have rules that prevent them from owning a stock unless it pays a dividend.

The decision to share some of its cash with stockholders also resonated symbolically. It is one of the clearest signs of change at Apple under the leadership of Timothy D. Cook, who became chief executive after Steven P. Jobs stepped down in August. Mr. Jobs, who died from complications of pancreatic cancer in October, long resisted calls to issue dividends and buy back shares, saying he preferred to hold onto the money for possible acquisitions or other investments.

Apple said that it would pay a quarterly dividend of $2.65 a share beginning in its fiscal fourth quarter, which starts July 1, and that its board had authorized a $10 billion share buyback starting Sept. 30. In all, Apple expects to spend about $45 billion over three years on the plan, all of the money from cash generated by its United States sales.

In a conference call with Wall Street analysts to announce the plan, Mr. Cook spent much of the time reassuring his audience that Apple’s top priority for its cash remained keeping the ability to finance its innovations. He said Apple still had a pipeline of strong products.

“Simply stated we don’t see a ceiling to our opportunities,” said Mr. Cook. He added later that returning some of its cash to shareholders “will not close any doors for us.”

Analysts generally agreed, saying that while the plan would slow the growth of Apple’s cash hoard, it would not reverse it. Even with the dividends and stock buybacks, analysts estimate that Apple’s total cash balance would grow by more than $30 billion a year in the near term because of how much new cash it takes in from its business.

Photo

An Apple employee counted receipts from sales of the new iPad on Friday. Apple said on Monday that it had sold three million units.Credit
David Paul Morris/Bloomberg News

By the close of Apple’s next fiscal year, which will end in September 2013, Apple could have around $180 billion in cash, after dividends and buybacks, estimated Gene Munster, an analyst at Piper Jaffray. He also estimated that Apple would report net income of $41.2 billion for the current fiscal year.

Apple executives said the plan would make it among the top dividend payers in the nation, but the amount is still small relative to its share price, amounting to a 1.8 percent annual yield on Apple’s stock.

That places Apple at the low end of its peers in the technology world, said Mike Abramsky, an analyst at RBC Capital Markets,. In comparison, he said, Microsoft pays a 2.5 percent dividend, Intel pays a 3 percent dividend and Hewlett-Packard pays a 2 percent dividend.

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In a research note, A. M. Sacconaghi Jr., an analyst with Bernstein Research, expressed disappointment with the size of Apple’s dividend, calling it a “pretty vanilla return of cash program.” Other investors said they thought Apple had done a good job of balancing competing concerns with the size of the dividend.

“It’s not too piddling, and on the other hand not so large to signal that growth prospects aren’t what they thought,” said David A. Rolfe, chief investment officer of Wedgewood Partners, a money management firm whose largest holding is Apple.

Shares of Apple rose 2.65 percent, or $15.53, to $601.10 Monday.

Apple’s shares were already widely held, but the decision to pay a dividend might spread them around even more. Every large fund family, from Fidelity to Vanguard, has “income-oriented funds” that will now be able to buy Apple shares, said Bill Choi, a managing director for Janney Montgomery Scott. “It is one high-quality name that they can own,” Mr. Choi said.

Mr. Jobs’s resistance to paying dividends was hardly unique in Silicon Valley. Even other dividend-paying technology companies like Cisco, Oracle and Microsoft are still among the biggest cash hoarders. Google, which does not yet pay a dividend, is in the club, too.

“There is a psychology in Silicon Valley where senior management likes to have a lot of cash on hand,” said David B. Yoffie, a professor at Harvard Business School. “Every financial economist would tell you it’s silly.”

Professor Yoffie said the mentality stems partly from the “near-death experiences” that some pioneers in technology have undergone, Apple included. When Mr. Jobs returned to Apple in 1997, it was near bankruptcy. Apple stopped paying dividends to its shareholders in December 1995, when its cash reserves were dwindling.

Earlier this year, Mr. Cook announced that Apple’s board was actively discussing what to do with the company’s cash. While the bulk of $45 billion it expects to spend will go to its dividend, Apple said its share repurchase would account for $10 billion of that figure over three years. Its primary purpose will be to eliminate the shareholder dilution that will occur from future Apple employee equity grants and stock purchase programs.

Apple said it would not finance the dividends and buybacks using any of the cash generated by overseas sales, which currently account for about two-thirds of its total cash balance. To bring that cash back to the United States, Apple would have to pay hefty repatriation taxes, very likely more than 30 percent.

The amount of money held overseas is likely to become a bigger part of its cash balance in the future as more of its sales shift to developing markets like China. Apple told Congress that current tax laws discourage United States companies from bringing foreign-held cash back home.

Christine Hauser contributed reporting.

A version of this article appears in print on March 20, 2012, on Page B1 of the New York edition with the headline: Flush With Cash, Apple Declares Dividend and Buyback. Order Reprints|Today's Paper|Subscribe